Bank of England prepares plan to buy assets

'Unconventional measures' to be considered to add reserves, increase credit

By

WilliamL. Watts

LONDON (MarketWatch) -- The Bank of England will soon ready a plan to buy assets in an effort to free up credit markets and restore lending to businesses and individuals if needed, Bank of England Governor Mervyn King said in a speech Tuesday night.

Despite a series of sharp rate cuts that have taken the key lending rate from 5% to 1.5% -- its lowest level since the central bank was founded in 1694 -- there remains a risk that inflation will fall below the Bank of England's 2% target, King said, according to remarks delivered to a business group in Nottingham.

King noted that the economy's downward momentum likely intensified in the fourth quarter, and warned that the contraction would probably continue at a "marked" pace over the first half of this year.

'In addition to these conventional unconventional measures there are also unconventional unconventional measures.'
Mervyn King, Bank of England

"With bank rate already at its lowest level in the bank's history, it is sensible for the [central bank's monetary-policy committee] to prepare for the possibility -- and I stress that we are not there yet -- that it may need to move beyond the conventional instrument of bank rate and consider a range of unconventional measures," the bank governor said.

Such measures would include purchases by the Bank of England of a range of financial assets to expand the amount of reserves held by commercial banks and to increase the availability of credit to companies, he added.

The conventional approach to such unconventional measures is to buy assets, like government bonds, or gilts, which are traded in liquid markets to boost the supply of money, King commented.

On Monday, the U.K. Treasury authorized the Bank of England to make initial purchases of as much as 50 billion pounds of assets. Such moves would be offset by issuing U.K. Treasury bills, making for no impact on money supply.

Yet the Treasury also said that it would consider allowing the central bank to use asset purchases for monetary-policy purposes, effectively opening the door to "quantitative easing" through operations similar to those at the U.S. Federal Reserve.

"In addition to these conventional unconventional measures there are also unconventional unconventional measures," King said. "When credit markets are dysfunctional, as some are at present, targeted purchases by the Bank of England of assets may improve liquidity in markets for those credit instruments. The objective of such purchases would be not only to boost the supply of broad money, but also to increase liquidity and trading activity in the markets for those assets."

Corporate bonds and commercial paper are examples of such markets, he added, but emphasized that the bank was carefully weighing its options and would offer a more detailed plan on potential asset purchases at the end of the month.

"It will be a matter of weeks, not days, before a program of purchases can begin, but it will be weeks, not months," King said.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.